Accounting for leases

Abstract

A lease is simply an agreement between two parties for the hire of an asset. The lessor is the legal owner of the asset who rents out the asset to the lessee. At the end of the lease the asset is returned to the lessor. The lessee will pay a lease rental to the lessor in return for the use of the asset. The accounting treatment for the lease entirely depends on the nature of the lease. For accounting purposes all leases are classified into one of two categories, they are either deemed to be ‘finance leases’ or ‘operating leases’. At its most clear cut an operating lease is a very short-term agreement for the temporary hire of an asset, e.g., hiring a car for two weeks to take on holiday.